UK bank Close Brothers is selling bonds from its second securitization of British leases for primarily used vehicles, according to a presale report.

The €309 million (US$368.7 million) Orbita Funding 2017-1 plc is the follow-up to Close Brothers Motor Finance’s debut €435.7 million asset-backed transaction in June 2016. The lender and servicer is a unit of UK merchant bank Close Brothers Group plc.

The deal includes a Class A tranche totaling €261.4 million with an Aaa rating from Moody’s Investors Service. The senior notes are supported by credit enhancement totaling 16.54%.

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Moody’s has a cumulative default expectation of 3.5%, with an expected recovery rate of 45%.

Moody’s said the transaction benefits from a high excess spread of 7.2%, based on the initial weighted average yield of 9.57% minus transaction costs and the Class A coupon of Libor plus 55 basis points. It also is enhanced by a 1.2% liquidity reserve fund, but has a 12-month revolving period which can add contracts that might cause changes to the underlying credit metrics.

The portfolio consists of primarily used-vehicle contracts under two types of UK auto leases: hire purchase and personal contract purchase (PCP), plus conditional sale contracts. The PCP accounts include final optional balloon payments from lessors that raise the risk of residual values in the portfolio.

Another risk in the deal is that under UK consumer-credit laws, owners have the option of terminating leases and returning vehicles after making at least half the payments on a lease. Lessees would generally owe half of what remains due on the lease, but Close Bros. Motor Finance would be on the hook for any residual value loss of the auto.

Close Bros., a long-time British institution established in 1878, is pooling nearly 44,000 contracts in the deal, with most to individuals (79.4% of the pool) for the purchase of passenger cars (71.9%). The remainder of the pool consists of corporate loans primarily for light commercial vehicles. None of the loans in the pool are delinquent.

The loans have approximately 3.21 years remaining.

The deal was co-arranged and co-led by HSBC and Lloyds Bank.

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